Prudential downgraded by S&P on demerger plan

S&P Global Ratings has downgraded UK-based multiline insurance group Prudential by one notch due to the company’s  demerger plan while downgrading the UK operations by two notches.

The move follows a downgrade by Fitch Ratings which was also driven by the demerger plan.

Prudential plans to demerge its UK & Europe business (M&G Prudential) from the US, Asia and Africa business, creating two separately-listed companies.

Following the move, S&P lowered its long-term issuer credit rating on non-operating holding company Prudential to 'A' from 'A+'.

The ratings agency also lowered to 'AA-' from 'AA' its long-term issuer credit ratings and insurer financial strength ratings on the group's core operating entities, including Jackson National Life Insurance, as well as the group's Asian operations Prudential Assurance Singapore. S&P also lowered its long-term issuer credit rating on Prudential Assurance (PAC UK and Europe) to 'A+' from 'AA'.

S&P now views PAC UK and Europe as nonstrategic to the group and assesses the entity's creditworthiness on a stand-alone basis. The agency considers that PAC UK and Europe, which will be part of M&G Prudential following the demerger, has, on a stand-alone basis, a narrower business focus, and tighter capital management than the group.

The downgrade of Prudential's core entities reflects S&P’s view that the carve-out of the UK operations makes the group less diversified. Specifically, S&P sees it as reducing the group's global reach and removing it from healthy market positions in the developed and mature UK and European markets. The demerger would result in the group having a narrower business position than a number of global multiline insurers.

S&P considers that PAC UK and Europe's geographic diversification is significantly more limited than the wider Prudential group. Its key markets are highly competitive, making a clear and precise stand-alone strategy critical. S&P believes that potential risks to PAC UK and Europe's capital and earnings exist due to its total exposure to defined employee benefit schemes being more focused following the demerger compared with the same exposure in relation to the global group on a consolidated level.

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